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US uses USMCA to take a shot at China

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BOLOGNA, Italy — President Trump’s economic war on China has escalated once again. This time, however, the U.S. has moved beyond just applying new tariffs to update the NAFTA agreement. The rebranded United States-Mexico-Canada Agreement (USMCA) currently awaits leaders’ signatures and legislative approval in each country. While the agreement provides small wins to Canadian consumers and American dairy farmers, the Trump administration has used the USMCA to isolate China from U.S. trading partners.

Article 32.10 of the agreement serves as one of the largest threats for Chinese officials. The article dictates that, should a member country of the USMCA reach a trade deal with a “non-market economy,” partners have the right to examine the potential agreement. Upon review, member countries can abandon the USMCA with six months’ notice.

American refusal to label China as a market economy is enough to subject the USMCA to these clauses. Meanwhile, China represents Canada’s second-largest trading partner and Mexico’s fourth-largest. Just last year, Canadian Prime Minister Trudeau and Chinese President Xi Jinping explored the idea of a free-trade deal.

The fact that deepened trade relations with China could trigger a USMCA fallout will likely deter Canadian and Mexican negotiators from deals with their leading Asian trade partner. If the U.S. pushes this agenda in negotiations with other allies, such as the European Union and Japan, China may be forced into further isolation. Already, Chinese embassy officials in Canada have protested against the inclusion of Article 32.10, possibly souring relations between Canada and China.

The USMCA takes further aim at China in the chapter on currency manipulation, which forces members to confirm their dedication to using market-determined exchange rates and binds them to currency examination practices. This is the first time in history that such a chapter has appeared in the core text of a major trade agreement.

The lack of controversy regarding North American exchange rates makes this a seemingly meaningless addition. However, this chapter could signal Trump’s intent to extend currency examination practices to future trade deals. China does not use a free-floating exchange rate and is known to devalue its currency in order to make their exports relatively cheap. As a result of this addition, Trump can justifiably claim that his apprehension over currency manipulation is shared across North America.

There is little doubt that the USMCA negotiation process sent a clear message to China. Trump’s “my way or the highway” attitude, tariff threats and self-imposed deadlines worked — both Canada and Mexico signed. If this is Trump’s strategy with his closest allies, it is easy to guess that these tactics will continue in his economic war against China.

White House Chief Economic Advisor, Larry Kudlow, has already indicated the next target for U.S. trade representatives: “The EU, Japan, the U.S., we’re going to send a signal to the Chinese…we’re not doing this alone…we’re getting a lot of support from our allies and, of course, the North American deal…I hope the Chinese are listening”.

Bottom line, the USMCA is about much more than trilateral trade – it’s another political instrument in the U.S. trade war with China.

Danielle Minnett is a SAIS MA ‘20 student from Canada studying the cross-section between trade and international development.